Third-Party Insurance Creates Many Different
(often conflicting) Relationships
Model Rules of Professional Conduct
• Rule 1.6 – Confidentiality of Information
• Rule 1.7 – Conflict of Interest
• Rule 1.8(f) – Conflict of Interest
• Rule 5.4(c) – Professional Independence
(a) A lawyer shall not reveal information relating to the
representation of a client unless the client gives informed
consent, the disclosure is impliedly authorized in order to
carry out the representation or the disclosure is permitted by
(a) Except as provided in paragraph (b), a lawyer shall not
represent a client if the representation involves a concurrent
conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to
another client; or
(2) there is a significant risk that the representation of one or
more clients will be materially limited by the lawyer's
responsibilities to another client, a former client or a third person
or by a personal interest of the lawyer.
Rule 1.7 (cont.)
(b) Notwithstanding the existence of a concurrent conflict of
interest under paragraph (a), a lawyer may represent a client
(1) the lawyer reasonably believes that the lawyer will be able to
provide competent and diligent representation to each affected
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim
by one client against another client represented by the lawyer in
the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in
(f) A lawyer shall not accept compensation for representing a
client from one other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer's independence of
professional judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected
as required by Rule 1.6.
(c) A lawyer shall not permit a person who recommends,
employs, or pays the lawyer to render legal services for
another to direct or regulate the lawyer's professional
judgment in rendering such legal services.
The Relationship Between The
Insurer and The Insured
Read the Policy
• Is there a duty to defend?
• Is there a right to defend?
• Is there a right to control the defense?
• Is there a right to associate with the defense?
• Is there a duty to cooperate?
• Is there a right to approve settlement?
• Is it an indemnity policy?
• Is it a liability policy?
• What are the expectations of the insured?
Relationships are simple
• There are no competing duties of defense counsel
• Defense counsel owes loyalty to client, and there is no
question that communications are privileged (unless they
fall into an exception to Rule 1.6)
This is where problems begin
• Now, defense counsel is being paid by a third party –
directly implicating Rules 1.8(f) and 5.4
• In this situation, we presume a covered claim, and there is
no dispute with respect to coverage
• Should be straightforward, right?
Not so Fast…
• Who controls settlement?
• Read the policy
• Who controls strategy?
• Read the policy
• Is the insurer entitled to information?
• Does disclosure to insurer waive privilege?
• Does the contractual duty to cooperate conflict with an
insured’s right to attorney-client privilege?
What Do The Cases Say?
And What Should We Do?
Privilege and the insurer
• Joint or common interest doctrine generally permits
disclosure without fear of waiver
• See Continental Cas. Co. v. St. Paul Surp. Lines Ins. Co.,
__ F.R.D. __, No. CIV S-07-1744, 2010 WL 1266926, *5-6
(March 30, 2010, E.D. Cal.) (applying California Law)
• Asbury v. Beerbower, 589 S.W.2d 216 (KY. 1979)
• North River Ins. v. Philadelphia Reins., 797 F. Supp. 363,
366 (D.N.J. 1992)
In some jurisdictions, an insured has no right to
claim privilege as against his insurer
• Nationwide Mut. Fire Ins. Co v. Bourlon, 172 N.C. App.
595, 605 (2005) (No right to privilege except for matters
unrelated to defense or for matters adverse to insurer)
• Northwood Nursing v. Continental Ins. Co., 161 F.R.D. 293,
297 (E.D. Pa. 1995) (Insured has no reasonable
expectation of privilege as against his insurer who is
defending the action)
Tripartite relationship creates a joint interest
• Insurer and insured’s interests are purely aligned. They
both seek to minimize or eliminate liability.
• Typically, both the insured and the insurer are considered
clients of defense counsel and privilege is shared between
them. See San Diego Navy Fed. Credit Un. v. Cumis Ins.
Society, 162 Cal. App. 3d 358, 364 (4th Dist. 1984)
Common interest must be legal and not merely
• See Square D Co. v. E.I. Elec., Inc., 264 F.R.D. 385, 391
(N.D. Ill. 2009)
The interest must also be identical and not merely
• See Duplan Corp. v. Deering Miliken, Inc., 397 F. Supp.
1146, 1172 (D.S.C. 1974)
Some states have even gone so far as to recognize
an insurer/insured privilege for just this reason
• Illinois – People v. Ryan, 30 Ill. 2d 456 (1964)
• Indiana – Richey v. Chappell, 594 N.E.2d 443, 446 (Ind.
• Missouri – State v. Barker, 540 S.W.2d 50 (Mo. 1976)
• See also Linde Thomson v. Resolution Trust Corp., 5 F.3d
1508, 1515 (D.C. Cir. 1993) (some insurer-insured
communications are protected by the attorney-client
Insurer has reserved rights and may dispute
• The dynamics have now changed
• The insurer and insured are no longer aligned
• Insurer may desire a litigation result that creates liability for
the insured while eliminating coverage (e.g. the insured
undertook some intentional act outside of coverage as
opposed to an accidental act)
• Insured seeks to either avoid liability or have his actions
determined to fall within coverage
• When conflicts arise insured is entitled to independent
counsel – paid for by the insurer
• Cumis, 162 Cal. App. 3d 358 (4th Dist. 1985)
• Maryland Cas. Co. v. Peppers, 64 Ill. 2d 187 (1976)
• At this point, the insurer loses its contractual right to control
the defense of its insured
A reservation of rights does not necessarily create a
complete conflict requiring Cumis counsel
• See Blanchard v. State Farm, 2 Cal. App. 4th 345 (2d Dist.
1991) (There is no right to independent counsel where
coverage issues cannot be influenced by counsel)
• L&S Roofing Supply Co., Inc. v. St. Paul Fire & Marine Ins.
Co., 521 So. 2d 1298 (Ala. 1987)
• Tank v. State Farm Fire & Cas. Co., 105 Wash. 2d 381,
387-88 (1986) (Defense under a reservation of rights
enhances insurer’s duty to its insured. Breach of this
liability may result in liability to insurer or to retained
Rule 5.4(c) governs defense counsel
When defense counsel defends a client, while being paid by
an insurer that is asserting a reservation of rights, counsel
must understand that he or she represents only the insured.
Van Dyke v. White, 55 Wash. 2d 601, 613 (1960).
Rule 1.7 also governs defense counsel
• Defense counsel owes a duty of disclosure to the insured
in three aspects:
1) Potential conflicts must be fully disclosed and resolved in
favor of the insured.
2) All information related to the insured’s defense must be
communicated to the insured.
3) All offers of settlement must be offered to the insured as they
are presented. The insurer may not exercise both its right to
approve settlement and its reservation of rights.
• See Tank, 105 Wash. 2d at 388-89.
• Are the parties’ interests aligned?
• Is the insurer contesting coverage?
• Is the reinsurer contesting coverage?
• Does the reinsurer have any right to associate with the
defense of the insured?
• If the reinsurer has challenged coverage, does this affect
the relationship between the insured and the insurer?
• What does the treaty/facultative certificate provide with
respect to the rights of the reinsurer?
• Is there a following fortunes clause?
• Following settlements?
• Duty of utmost good-faith?
• Right to associate?
• Salvage rights?
This situation is different than with a reinsurer
because the excess carrier will be in privity with the
• Are interests aligned?
• Has the primary insurer accepted coverage?
• Does the excess policy incorporate the underlying cover?
• Does the excess carrier have rights with respect to the
conduct of the defense of the insured?